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NZD/USD at 0.77c by the end of 2021?

The New Zealand Dollar against the U.S Dollar has been a good barometer for the state of risk-on assets. It currently sits at around 0.7195, with technicals showing a possible strong move in the future. We now see a flat bottom wedge forming, with the wedge's completion seeing the NZD/USD make a violent move to the upside.

NZD/USD flat bottom wedge forming

Historically, the price is in an area prone to intense swings to the upside and the downside if we look left.  A move to the upside may finally bring 0.74c on the table, while a break of the flat bottom wedge before completion may see a move back to 0.70c. However, New Zealand's fortunate spot in eradicating the virus may allow tailwinds to support the technical possibilities.

Positive inflation numbers decrease the likelihood of further rate cuts

In the latter part of January this year, New Zealand's inflation numbers were better than expected at 1.2%, strongly surpassing analysts' forecasts of 0.2%. Jarrod Kerr, Chief Economist at Kiwibank in Auckland, stated that "the medium-term outlook for inflation looks stronger compared to just a few months ago."  Like many analysts, Jarrod has reversed his viewpoint for more RBNZ cuts this year. This comes as many New Zealand retail banks such as ANZ and Westpac see that New Zealand's sharp recovery due to successful Coronavirus measures is likely to affect further rate cuts coming down the line. Both banks have retracted their rate cut predictions.

Unemployment beats expectations

Analysts predicted a rise in employment in the past quarter, with the RBNZ predicting unemployment rising from 5.6% to 5.3%. However, with numbers showing a drop to 4.9%, any optimism in rate cuts has all but vanished. Capital Economics further emphasized their view that interest rates in New Zealand would rise from next year.

BNZ's Forecasts for RBNZ's Interest Rates

Both are no doubt positive for the New Zealand economy and its citizens. However, this will turn the New Zealand dollar into a missile. Stephen Toplis, Bank of New Zealand's head of research at Bank of New Zealand, stated that they are "formally building a rate hike [in their model] in May 2022" and that this may be "pouring fuel on the New Zealand Dollar that is already on fire." Many other senior economists are conveying the same viewpoint, with ASB's senior economist Mike Jones stating saying that the RBNZ's and fiscal stimulus "has done the trick, and no more is required."

With a surging house market, lower than expected unemployment, and higher than expected inflation, alongside favorable technical, the New Zealand dollar may be poised for a move upwards.

NZD/CAD – Long term trends may suggest a reversal

This pair has been ranging in a consistent bound for the past seven or so years. If we have a look at a longer-term timeframe,

NZD/CAD ranging between $0.8 and $0.95 over the past 7 years

We can see that the pair has been ranging between $0.8 and $0.95, with a significant support/resistance area at 0.9. Currently, the price is just under 0.90c, at 0.899.

NZD/CAD - RBNZ comments outweighing vaccine sentiment

New Zealand has rallied on the government's consistent handling of the Coronavirus, and more recently, the RBNZ comments suggesting that negative rates are less likely to be on the table, implying a better than expected in the New Zealand recovery.

However, upbeat sentiment on a Pfizer vaccine before the end of the year has spiked a risk-on rally, especially in the Oil markets. The Canadian Dollar is known for its commodity correlation like the Australian Dollar, in which the CAD strengthens/weakens depending on the price of commodities like Oil. In the past five days, Oil has rallied over 7% on Pfizer vaccine's news. Oil rallying tends to strengthen the Canadian Dollar.

However, the Canadian Dollar has not strengthened against the NZ Dollar, with recent RBNZ's comments further strengthening the NZD. However, as we approach this significant support/resistance area, alongside further positive news on a Coronavirus vaccine before year-end, may end the Bull rally in the New Zealand dollar and heavily reject that 90c resistance level.

NZD/CAD - Canada's Coronavirus situation not helping the Loonie

There is not much news following the Coronavirus situation in Canada. However, the country has experienced a recent Coronavirus spike due to its non-essential lockdown restrictions. The government faces a similar curve to that of the United States and in Europe.

Due to this, top deputy Carolyn Wilkins from the Bank of Canada stated that the country "is likely to exit the pandemic with a lower profile for potential output, leading to a significantly diminished ability to generate goods, services, and incomes on a substantial basis." She also states that "Canada's plan to lift immigration levels will boost potential output growth overtime."